I would probably start by searching and understanding these things, if you want to do it yourself:
Know what compound interest is and how it works. Albert Einstein called it the eight wonder of the world”, and if you don’t know exactly why he did that, i would start there. Because this is such a key thing in investing.
Always spread your risk on different assets, companies, markets and instruments. There is risks involved in investing, and the best way to limit your risk is by allocating your assets the right way.
All weather portfolio and portfolio management
When we talk about investing and asset allocation, you could also gain a lot of knowledge by understanding how an “All Weather portfolio” works.
Stocks/bonds or Index funds
Know the key metrics of index funds, stocks and bonds before you start investing your money. For most new investors index funds would be preferable, because you by buying one index fund can spread your risk on 1000 of stocks and different sectors. If you would like to invest in stocks and bonds instead, look further below here for my thought on that.
Investing in the Stock market:
First of all you should start by gaining and gathering some knowledge about the stock market. If you are serious about investing and allocating your money the right way, you should start by getting to know the risks involved in investing in the stock market.
After that, i would recommend you to try to develop a strategy for your investing approach. It can be difficult in the beginning, but here I can give you a few points to consider when stating out creating a strategy.
You should know exactly how the company makes money, and what their market is. If you cannot define how they operate, how should you be able to see if it could be a great investment, and if the company is better than their competitors?
Also Read 7 Common Money Traps to Avoid
After you have figured out how the company works, and what their place is in the market, you can begin to go through the company more directly. I often look at:
- Debt (Is the company in great debt, or do they have low to non debt)
- Managers and Board of directors (Who are they, and why are they worth to invest in)
- Financials (Are they making money, are they investing in the company, are they growing or declining)
- Competitors (Why should you invest in THIS company and not their competitors
- Future possibilities for the company (Can you see them operate in 5 year? Do they have a product that would be needed in 3–5 years or are they going to be run over by competitors)
- Valuation (Is it actually worth investing in the company or are they valued too high)
- The market psychology (Are investors taking money out of the market, or putting money in the market)
- The economic conditions of the market (timing the market can be very difficult, but you want to have an idea about the conditions you are investing in and the risks that follow)
- Your investment approach (Are you investing in the company to get a dividend each year, are you investing because of the undervaluation or are you investing because of the future growth)
- Does the company fit in your portfolio (Are you looking at a Biotech company and you portfolio is already filled with biotech, maybe you should consider allocating over different sectors)
- Do you have any knowledge about the sector (Do you have an edge in the sector, that will help you create better results and better decisions.)
What you usually look at before investing is different from investor to investor. Personally I look more at the future, and try to see if the company has a innovative product that would be great in the future.
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Others see more at the financials and valuations. So you should define for yourself first, what your strategy is.
A few key things that can help you in your future as an investor:
- Save each month
Put a side some of your income each month for investing. When the market declines you want to have money on the side that you can use to buy more of the good companies or funds. When saving some of your income each month you make sure, that you will never run out of cash, and it helps your investments grow in the long run.
- Fees and hidden fees
Know that when you invest you are paying fees in order to buy stocks, bonds or index funds. And if you use index funds, you are also paying a yearly fee. Compound interest can work for you or against you. And if you don’t know which fees you are paying, you could end up having compound interest working against you and taking too much of your profit each year.
Also read 5 Advantages of Investing in Your 20s
Personally I hate paying more for something that is not greater. I use 3–4 different brokers to invest from because they all offer low fees on different products and different markets.
I am always comparing index funds to find the best performing, with the lowest fees, and making sure that they are not more expensive then their competitors. I do not mind paying more if I get a greater product, but often this isn’t the case. So make sure you know the price!